The US Dollar held firm near 99.15 in early European trade, supported by uncertainty in the Middle East. Donald Trump said the US would “hold off” an attack on Iran planned for Tuesday and would accept a deal that stops Iran getting a nuclear weapon, but said the US could still attack without setting a deadline.
With the Strait of Hormuz still closed and energy markets disrupted, traders adjusted expectations for US interest rates. CME FedWatch shows a 35.0% chance of a 25 basis point Fed rise by year-end.
Market Data And Central Bank Signals
Japan’s preliminary data showed GDP rose 0.5% quarter-on-quarter in Q1 2026, up from 0.3% in Q4 2025 and above a 0.4% forecast. Annualised growth was 2.1%, up from 1.3% and above a 1.7% consensus.
RBA minutes showed eight of nine members backed the May rate rise to 4.35%, while one preferred to wait for more data. Canada’s CPI is due, with forecasts of 3.1% year-on-year in April (2.4% prior) and 0.6% month-on-month (0.9% prior).
EUR/USD fell near 1.1645 and GBP/USD traded around 1.3415 as UK unemployment rose to 5.0% from 4.9%; claimants rose 26.5K, employment change was 148K, and USD/JPY neared 158.90; gold dropped to $4,545.
The core issue for us is the geopolitical tension in the Middle East, which is driving fears of a global energy shock and inflation. We should position for higher interest rates by using derivatives, as central banks like the Fed and RBA are being forced to tighten policy. Looking back at the 1970s oil crisis, we saw how a similar disruption led to a prolonged period of high inflation and aggressive rate hikes from the Federal Reserve.
This environment makes the US Dollar the strongest currency, acting as both a safe haven and benefiting from potential rate hikes. We should favor long dollar positions, especially against the Euro, which is vulnerable to energy supply issues, and the British Pound, which is weighed down by weak unemployment data. For example, in the six months following the start of the major European conflict in 2022, the U.S. Dollar Index (DXY) gained over 15%, demonstrating how the dollar thrives in these conditions.
Key Trades And Risk Scenarios
We must watch the USD/JPY pair closely, as it trades near 159.00 and Japanese officials are warning of intervention. This volatility presents a clear opportunity to use options to bet on a sudden, sharp strengthening of the yen if the Bank of Japan acts. We saw Japan spend over $60 billion on intervention in the autumn of 2022 to defend its currency, making the current threats highly credible at these record levels.
With the Strait of Hormuz closed, the most direct trade is to be long crude oil, anticipating further supply disruption and higher prices. We can use futures or call options to capitalize on this, as any escalation in the conflict will likely cause another price spike. Historically, the 1990 invasion of Kuwait caused oil prices to more than double in less than three months, a reminder of how quickly this market can move.
Gold is falling because the market is more focused on higher interest rates than on geopolitical risk, which makes holding a non-yielding asset like gold less attractive. This suggests short-term trades to the downside may work, but we must remain nimble. A full-scale war could easily reverse this trend, causing a massive flight to safety that would send gold prices soaring despite central bank policies.
